I’ve recently opened a brokerage account and have started to get familiar with the dashboard.
One of the first things I need to learn is how to buy and sell stocks.
In this article we’re going to review all the major order types.
Understanding Market Basics
- Bid Price: The highest price a buyer is willing to pay for a stock.
- Ask Price: The lowest price a seller is willing to accept for a stock.
- Spread: The difference between the bid and ask prices. A narrower spread usually indicates higher liquidity.
- Liquidity: A measure of how easily a stock can be bought or sold in the market without affecting its price.
Related article: What are Stocks?
In this example, the highest price someone is will to pay for TSLA stock is 191.09. So if you wanted to sell your shares to the market, you would be able to instantly sell them for 191.09. This is the bid price: It’s the price the market is willing to buy a share for.
At the same time, the lowest price someone is willing to sell TSLA for is 191.13. So if you wanted to buy a share, you could instantly buy one for 191.13. This is the ask price: The price the market is willing to sell a share for.
The spread is the difference between the bid and the ask: 191.13 – 191.09 = 0.04.
Stocks that have high liquidity have tighter spreads (lower) because there are many buyers and sellers. Stocks that have low liquidity have wider spreads (higher) because there are not as many buyers and sellers.
Basic Order Types
- Market Order: Buys or sells a stock immediately at the current market price.
- Limit Orders: Sets a specific price at which you want to buy or sell a stock. The order is executed only if the market reaches your set price.
- Stop Order (Stop Loss): An order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price.
Market Orders
Market orders are used when you want to immediately buy or sell a stock. Sometimes you will pay higher than the ask price, and sell for lower than the bid price, but your order will be filled immediately. You will be getting the best price available at the exact time of your order, and your order is executed right away. However, market conditions will influence the price that your shares ultimately get sold for.
Limit Orders
A buy limit order sets a specific price that you will buy a stock for. Once the stock price reaches your limit price, you will automatically buy the shares in your order at that price or better.
A sell limit order sets a specific price at which you aim to sell a stock. Once the stock price rises to your limit price, your shares will automatically be sold at that price or higher.
Keep in mind that with limit orders there is no guarantee that your entire order will fill. If you’re buying or selling a lot of shares and the stock is not very liquid, meaning there aren’t many buyers and sellers, your entire order may not execute at the limit price.
Stop Orders (Stop Loss)
A stop order is similar to a limit order, however once the stop price is reached, your entire order will execute like a market order. This means you might buy or sell your shares above or below your set stop price. So the prices are not guaranteed, however your order will be completed.
A buy stop order is set to purchase at a price higher than the current market value and activates when the market price hits or surpasses the specified stop price.
On the other hand, a sell stop order is established to initiate a sale once the market reaches a predetermined price.
Advanced Order Types
- Stop Limit Order: Combines a stop order with a limit order. Once the stop price is reached, the order becomes a limit order to buy or sell at the limit price or better.
- Trailing Stop Order: Sets a stop order at a fixed amount below or above the market price with an automatically-adjusting stop price as the market price moves.
Buy and Sell Stop Limit Orders
A stop limit order is similar to a stop order, however there is a limit price at which the stock can’t be sold for less than. If you set up a sell stop limit order and the stock drops to your stop price it will get sold, but it won’t get sold below the additional limit price.
For a buy stop limit, you set a stop price and once that is hit, your buy limit price is activated and the stock will not be purchased for higher than the limit price.
Trailing Stop Orders
With a trailing stop order there is an initial stop loss price, and a trailing price. As the stock price rises, the stop price rises by the trail amount.
A trailing stop sell order positions the stop price a specified distance beneath the current market value, incorporating a “trailing” quantity that adjusts upward with the market. Should the market advance, this trailing value increments accordingly, elevating the stop price. However, should the market value of the stock decline, the stop price remains stationary. Upon the market hitting this stop price, a market order is triggered.
Short Selling
- Selling a stock short means you sell high, and buy back low. You sell a stock you do not currently own, hoping to buy it back later at a lower price to profit from the decline in price. Read the full article here.
Order Strategies
- Bracket Orders: A type of order where you place three orders at once: a main order to buy or sell, a take-profit order, and a stop-loss order.
- One-Cancels-the-Other (OCO) Orders: A pair of orders stipulating that if one order is executed fully or partially, then the other is automatically canceled.
Bracket orders allow you to lock in profits and limit losses. OCO orders give you more flexibility with your investments.
